What does "transfer pricing" refer to in corporate taxation?

Transfer pricing specifically refers to the pricing of goods, services, and intangibles that are exchanged between related entities, often within multinational corporations. This mechanism is critical because these transactions can significantly affect a corporation’s taxable income due to the way profits are allocated across different jurisdictions. When related entities transact with each other, especially across borders, they have the ability to set prices that may not reflect market values. This can lead to tax implications as different countries may have varying tax rates, which can incentivize companies to manipulate prices to minimize tax liabilities.

The importance of transfer pricing lies in the need for tax compliance and maintaining fairness in the allocation of income among jurisdictions. Tax authorities scrutinize these transactions to ensure that they adhere to the "arm's length principle," which states that the prices charged between related entities should be consistent with those charged between unrelated entities in the open market.

Other options do not accurately capture the specifics of transfer pricing. For example, referencing pricing between unrelated entities ignores the primary concept of transfer pricing, which specifically involves related entities. Similarly, the focus on exporting goods or pricing strategies of large corporations does not encompass the broader definition and implications of transfer pricing in the context of corporate taxation.